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Retirement

Q&A: Social Security eligibility

September 21, 2015 By Liz Weston

Dear Liz: I have a few Social Security credits but not enough for full Social Security benefits. My husband receives a check monthly. He is 79 and I am 75. Am I eligible for any benefits at this time?

Answer: You’ve been eligible for full spousal benefits since you turned 65. You could have gotten a reduced amount as early as age 62. You’ve missed out on thousands of dollars of benefits that were yours to claim.

People need 40 credits with Social Security to apply for their own retirement benefits. Typically that means working a minimum of 10 years. But you didn’t have to work at all to receive spousal benefits based on your husband’s employment record. At your own full retirement age (which is now 66, but was 65 until recently), you could have received a monthly check equal to 50% of your husband’s benefit.

Once you file, you only can get six months of retroactive benefits. There’s nothing that can be done about the rest of the benefits you’ve missed, but perhaps this letter will alert other spouses that they may qualify for Social Security even if they haven’t worked much outside the home.

Filed Under: Q&A, Retirement Tagged With: q&a, Social Security

Q&A: Thrift Savings Plan

September 14, 2015 By Liz Weston

Dear Liz: I am a federal government retiree with a very small retirement account in the Thrift Savings Plan. Where can I invest my small savings so it can safely grow? The balance has not changed for over six months now. If I keep it in the Thrift Savings Plan, what fund is the safest?

Answer: “Safe growth” is an oxymoron. If your balance isn’t changing, then you’re probably in the safest option — which means you won’t see much if any growth in the future, either.

You probably chose TSP’s G Fund, which invests in Treasury securities. You won’t lose money, but you probably won’t earn enough to offset inflation. If you want your money to grow, you need to have at least some of your retirement account in stocks.

Fortunately, the plan offers several “L” or lifestyle funds geared to when you expect to begin withdrawals. L funds offer professional management and a mix of investments that grow more conservative as that date approaches. Retirees who are tapping their accounts typically invest in the L Income fund, which has about 20% of its balance in stocks. If you are five years or more away from using the funds, the next most conservative lifestyle option is L 2020, which has half of its total invested in stocks.

Filed Under: Q&A, Retirement Tagged With: q&a, Retirement, Thrift Savings Plan

Q&A: Understanding Social Security survivor benefits

August 31, 2015 By Liz Weston

Dear Liz: I need a clarification because I’m getting conflicting answers from Social Security.

I know if you start Social Security benefits early, you get them at a reduced rate. When your spouse dies, is your survivor benefit reduced as well? My friend’s mother never worked, but started collecting spousal benefits at 62. Does she get reduced or full benefit when her husband dies?

Answer: Her survivor’s benefit is not reduced because she started spousal benefits early. It may be reduced, however, if her husband started retirement benefits early or if she starts survivor’s benefits before her own full retirement age.

Survivor’s checks are based on what the husband either was receiving or had earned. If the husband starts retirement benefits before his own full retirement age (currently 66), his checks are reduced, which also reduces what his widow could receive as a survivor.

If he delays retirement past 66, he earns 8% annual “delayed retirement credits” — an increase both would get.

If he dies before full retirement age without starting benefits, the survivor benefit would be based on what he would have received at full retirement age. If he dies after full retirement age without starting benefits, the survivor check is based on the larger amount he had earned (in other words, his benefit at full retirement age, plus any delayed retirement credits).

How much of the husband’s benefit his widow would get depends on when she starts claiming her survivor’s benefit.

If she starts at the earliest possible age of 60 (or 50 if she’s disabled, or any age if there are children under 16), her survivor’s benefit will be reduced to reflect the early start.

If she waits until her full retirement age, by contrast, the survivor’s benefit would be equal to what her husband was receiving or had earned. Waiting to start survivor benefits until after her full retirement age doesn’t increase her check, however.

Filed Under: Q&A, Retirement Tagged With: q&a, Retirement, Social Security survivor benefits

Q&A: IRA contributions and tax deductions

August 10, 2015 By Liz Weston

Dear Liz: I am changing jobs because of a layoff. I contributed to my former employer’s 401(k) to the extent possible. My new employer also offers a 401(k), but I won’t be eligible for a year.

I want to use an IRA in the meantime. I do not understand how I should answer the question on the tax form about whether my employer offers a retirement plan when I am determining how much of my IRA contribution I can deduct. My employer does, obviously, but I can’t participate yet. Advice, please?

Answer: You’re smart to continue your retirement savings while you wait to become eligible for the new employer’s 401(k). Missing even one year of contributions could cost you tens of thousands of dollars in lost retirement income.

When you’re not covered by an employer plan, all of your contribution to an IRA is typically deductible.

When you are covered, your contribution’s deductibility is subject to income limits. In 2015, the ability to deduct an IRA contribution phases out between modified adjusted gross incomes of $61,000 to $71,000 for singles and $98,000 to $118,000 for married couples filing jointly.

To be considered covered by an employer plan, you have to be an active participant, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. That means money has to be put into your account by you or your employer or both.

Here’s the twist: You’re considered covered for the whole tax year if you participated in a plan during any part of that year. So the IRS will consider you an active participant for 2015 because you were contributing to your former employer’s plan for part of this year.

If you start contributing to your new employer’s plan when you become eligible next year, you’ll be considered covered for 2016 as well.

You could decide not to contribute to the new employer’s plan until 2017 to preserve your IRA’s deductibility, but it probably makes more sense to start contributing to the new plan to get both the tax break and any match.

If your contribution to an IRA isn’t deductible, consider making a contribution to a Roth IRA instead.

In retirement, withdrawals from a regular IRA will be subject to income taxes while withdrawals from a Roth IRA will be tax free. In 2015, your ability to contribute to a Roth phases out between modified gross incomes of $116,000 to $131,000 if you’re single and $183,000 to $193,000 if you’re married.

Filed Under: Q&A, Retirement, Taxes Tagged With: IRA, q&a, Retirement, tax deductions, Taxes

Q&A: Delaying Social Security benefits

August 3, 2015 By Liz Weston

Dear Liz: I’d like to get something straightened out. Between things that you and other columnists have said, we laymen have been told that if we wait until we’re 70 to start taking Social Security, we’ll get 8% more for each year we delay, and a total of 40% more than if we start taking it at our retirement age.

But the retirement age is 66, not 65. So there’s a four-year difference, which would produce an increase of only 32%. Even if the yearly increase is exponential (compounded), the total increase after four years would be 36%. So where does that 40% figure come from?

Answer: It didn’t come from this column, so it probably came from someone who was writing when 65 was the full retirement age.

As you note, the full retirement age is now 66 and will move up to 67 for people born in 1960 and later.

Delayed Social Security benefits max out at age 70, so there are fewer years in which a benefit can earn a guaranteed 8% annual return for each year it’s put off. Delayed retirement credits aren’t compounded, but the return is still better than you could get guaranteed anywhere else.

That doesn’t mean delaying Social Security past full retirement age is always the right choice. Social Security claiming strategies are complex, with a lot of moving parts, particularly if you’re married.

Before filing your application, you should use at least one of the free calculators (AARP has a good one on its site) and consider using a paid version, such as MaximizeMySocialSecurity.com, if you want to tweak some of the assumptions or if you have a particularly complicated situation.

Filed Under: Q&A, Retirement Tagged With: q&a, Retirement, Social Security

Q&A: File and suspend strategy for Social Security

July 13, 2015 By Liz Weston

Dear Liz: You recently wrote an interesting piece regarding the “file and suspend” strategy for Social Security benefits. I liked the possibility of getting a lump sum if I should need the money downstream.

But when I checked with Social Security, I was told that the lump sum maximum was six months of suspended payments. Am I missing something? My understanding was that I could collect all the suspended payments if need be. Is there a specific code I could reference to our Social Security office to clear this matter up?

Answer: You’re not missing something. The Social Security representative you talked to is confusing retroactive benefits with the reinstatement of benefits that were voluntarily suspended.

When you file for benefits after your full retirement age (currently 66), the maximum lump sum you can get is six months’ of missed benefits.

When you “file and suspend” your application at or after full retirement age, however, you can end the suspension at any time and get a lump sum for all the benefits you missed.

Unfortunately, the misinformation you received isn’t unusual.

Financial planners around the country have reported running into Social Security reps who insist that only six months’ of benefits are available to people who file and suspend, which isn’t true.

The procedure is outlined in the Social Security Administration’s “Program Operations Manual System” under GN 02409.130 Voluntary Suspension Reinstatement

It’s also described in plain English on Social Security’s site: “If you change your mind and want the payments to start before age 70, just tell us when you want your benefits reinstated (orally or in writing). Your request may include benefits for any months when your payments were suspended.”

The ability to file and suspend, then change your mind, is an important protection for those who understand the important role Social Security plays as longevity insurance.

The smartest course is often to let your benefit grow to its maximum amount, taking advantage of the “delayed retirement credits” that increase your benefit 8% annually between your full retirement age (currently 66) and age 70.

If you should later find yourself in need of the money, you can get a lump sum payout for the missed benefits back to the day you filed and suspended, if you want.

But opting for the lump payment means you lose your delayed retirement credits for that period. In other words, if you ask for a lump sum dating back to your initial filing, your monthly benefit is reset to the smaller amount you would have gotten then.

Filed Under: Q&A, Retirement Tagged With: file and suspend, q&a, Social Security

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